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MGM Mirage's Stock Is No Illusion; Sad, Sad Tale at Unisys

Stock Exchange lets readers listen in as Times staff writers James Peltz and Michael Hiltzik debate merits of individual stocks.

September 19, 2000|JAMES PELTZ and MICHAEL HILTZIK

MGM Mirage (MGG) Jim: Buy

Mike: Buy

Jim: This stock brings us back to the gaming sector, which is one of your favorites, right, Mike?

Mike: Yep. Except my last couple of picks left me feeling like I've watched the dealer hit a natural while I was holding at 20. I keep getting slapped down. But you know what? I'm stepping back up.

Jim: Really?

Mike: I'm putting my money back down on the felt.

Jim: You're recommending the stock before we even start?

Mike: I am.

Jim: Guess what? Me, too. Now, we discussed Mirage Resorts many moons ago, but then Mirage was bought in June by MGM Grand, which is controlled by that octogenarian billionaire Kirk Kerkorian, to create MGM Mirage.

Mike: In fact, Kirk owns nearly 65% of this stock.

Jim: But let's step back a bit. Mirage, of course, was run by the flamboyant Steve Wynn. And it stands to reason that the only one powerful enough to take over his company would be Mr. Kerkorian, who has been a fixture in Las Vegas for what, four decades now?

Mike: I think Kerkorian has the distinction of having built not once, but three times, the largest hotel in the world. The first one was the International Hotel; then came the first MGM Grand, which had a famous fire many years ago and is now Bally's. And now there's the existing MGM Grand, which is a 5,000-room behemoth. I mean, that place is a zoo--but a well-appointed zoo.

Jim: And besides the MGM Grand, look at what other properties MGM Mirage now runs on the Vegas Strip: the Bellagio; the Mirage; New York, New York; and Treasure Island, to name just some.

Mike: Let's not forget casinos in Atlantic City, N.J.; Biloxi, Miss.; which is a big gambling venue; Detroit and Australia. That Detroit casino is very successful and actually challenges my position that there is nothing morally wrong with casino gambling.

Jim: Why do you say that?

Mike: Because the part of that axiom that I usually don't say is that there is nothing wrong with casino gambling in the right place. And the right place is segregated in gaming towns such as Las Vegas and Atlantic City. It doesn't belong anywhere near a city like Detroit or Chicago.

Jim: Let's get back to Vegas, where MGM Mirage now controls more than 18,000 rooms. My take on this stock is simple: I like having Mr. Kerkorian on my side as an investor. I won't call him ruthless, but there's nothing sentimental about how he runs companies. And I see him taking zillions of dollars of overlapping costs out of the combined companies, which will swell its profits.

Look, it was no coincidence that one of his first acts was selling more than $100 million worth of art that Wynn had put in his properties.

Mike: Of course, the joke is that 80% to 90% of the costs that MGM Mirage has taken out of Mirage so far came from selling the art. And they say there's still some of that art for sale, if anyone wants to bid for Rembrandt's "Aristotle Contemplating the Bust of Elvis."

Jim: OK, so Kerkorian's got great properties, he's cutting costs and he's got a strong gaming market right now, with visitor traffic to Vegas very healthy.

Mike: Plus he's got a strong management team, led by J. Terrence Lanni. Lanni's one of the savviest operators on the Strip. He cut his chops at Caesars and then went on to MGM, where he's done a great job.

Jim: Also, MGM Mirage now controls more than 50% of the Vegas baccarat business. Now, I know this isn't one of your favorite games, Michael, but . . .

Mike: All I've said is that professional card players do not play baccarat, for the simple reason that, unlike blackjack, baccarat is not a game in which card-counting can gain you an edge. And that's what the pros do.

Jim: In other words, you can't cheat at it.

Mike: Let me set you straight, Jim. Card-counting is not cheating by any standard, including the legal one. It's the highest expression of gambling skill. And if you think I'm kidding, try to do it.

Jim: Whatever. The point is, lots of high rollers love baccarat, and it brings the casinos lots of cash.

Mike: Right, it's a favorite game of Asian and South American high rollers. And casinos such as the MGM and Mirage properties spend scads of money to ship these rich guys in because their play is so lucrative. In fact, the casinos often discount their losses.

Jim: You're kidding.

Mike: No, they'll give back some of the money the high rollers lose because the companies still come out ahead, even after counting the costs of providing limos, private planes and private dealers in tuxedos.

Jim: Now since the MGM Mirage merger closed in June, the stock hasn't done much. But I see it taking off after the company posts a couple of quarters' results, which I'm betting will meet or exceed Wall Street's forecasts. And with the stock selling for 22 times this year's expected per-share profit, it's attractively priced, too.

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